UC Berkeley Haas School of Business Professor Andrew Rose
finds that World Trade Organization membership does not increase
trade, but European Monetary Union membership does.

Economists generally agree that joining the European Monetary
Union (EMU) is a colossal waste of time and money but World
Trade Organization (WTO) membership guarantees an improved
economic outlook. However, UC Berkeley Haas School of Business
Professor Andrew Rose has found just the opposite: Membership
in the WTO does not result in increased trade, while membership
in the EMU does. His controversial findings have been at
the heart of some major international debates.

Rose’s research is based on detailed models of trade
that factor in such variables as the distance between countries,
common language, and history. In his common currency research,
Rose also relied on United Nations trade data for 186 countries
between 1970 and 1990. He detailed his findings in his article, “One
Money, One Market: The Effect of Common Currencies on Trade” (Economic
Policy, April 2000).

Extrapolating from data on the economic results of monetary
unions primarily in Latin America and Africa, Rose predicts
that trade between any two countries in the EMU will eventually
triple. "That's a big effect and would certainly swamp
any costs associated with monetary unification," he
observes.

Rose does add a caveat, however. “We can’t be
sure the same effects we have estimated for a collection
of countries that are small, poor, or both can be extended
to large, rich countries such as those in the EMU,” Rose
acknowledges in his research. But he has no choice but to
heavily rely on data from such countries because they were
the only ones in currency unions prior to the launch of the
EMU.

Although data are preliminary, the consensus estimate among
economists is that trade inside the EMU has already increased
by 15 percent.

"Unions make prices become more transparent," says
Rose, explaining one reason behind the increase in trade.
That is, wholesalers and consumers in France, for example,
can now more easily understand and compare the price of goods
and services coming from Germany.

Moreover, wholesalers and distributors do not have to worry
about exchange-rate risk. "All of this makes it easier
for goods and services to pass across borders," explains
Rose, director of the Clausen Center for International Business
and Policy and the Bernard T. Rocca Jr. Professor of International
Business at the Haas School.

Rose is also making waves among both globalization advocates
and detractors with his study on the WTO, the first research
to test whether the international trade body is responsible
for the increases in trade over the last 50 years. The latest
round of trade talks among the WTO’s 149 member countries,
called the Doha round, is currently hung up on cutting rich
countries’ farm subsidies and tariffs, a vital issue
to poorer nations that rely heavily on farm trade.

But in examining whether countries inside the WTO trade
more than countries outside, Rose came to the startling discovery
that there is no difference. He outlined his WTO findings
in his article, “Do We Really Know that the WTO Increases
Trade?” (American Economic Review, March 2004).

"Those on both sides of the globalization debate think
a lot rests on whether the current round of trade liberalization
succeeds or fails," Rose comments. "But my analysis
reveals that such rounds really have no effect on trade,
good or bad."

Rose himself wondered how WTO status actually proves to
have such little influence on members' trade relationships
with each other. The answer, he says, was inspired by his
five-year-old son Asher, a frequent source of research ideas.
On this occasion, the inspiration came when Asher wanted
to visit the lounge during a stopover in the Singapore airport.

"I said we could do so if he would refrain from running
around and screaming, and he agreed,” Rose recounts. “As
soon as we got into the lounge, he went wild. I sat him down
and said, hey, we had a deal that you wouldn't run around.
And he said, yes Dad, but now I'm in!’"

"That turns out to be exactly what happens with the
WTO," Rose continues. "Countries make all sorts
of promises to lower tariffs, reduce quotas, and so forth,
in order to get into the organization, but once they're in
they don't change their behavior. That affects the amount
of trade that is possible between them."